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Our Take: Walgreens takes $5.8 billion 2Q impairment charge, will close more VillageMD locations

Apr 01, 2024

Walgreens Boots Alliance (WBA) reported a net loss of $5.9 billion in its second quarter, which ended Feb. 29. Of that amount, $5.8 billion was a non-cash goodwill impairment charge related to VillageMD — in other words, a massive write-down on the value of Walgreen’s investment in the primary care chain. 

Last fall, Walgreens said it planned to close 60 underperforming VillageMD clinics  as part of an initiative to trim $1 billion in costs. But on the earnings call Thursday,  CEO Tim Wentworth said 140 VillageMD locations have already been closed, with approximately another 20 still to go.  

Manmohan Mahajan, Walgreen’s chief financial officer, said the impairment charge was due, in part, to “lower than previously expected longer-term financial performance expectations.” 

Recent changes in Medicare reimbursement models contributed to those lower financial performance expectations, he said, as did slower than expected trends in patient panel growth and multi-specialty productivity.

“This goodwill write-off is non-cash, and we do not believe it will have a significant impact on our financial position or our ability to invest across businesses going forward,” Mahajan added. “During the first half of fiscal ’24, we have seen positive financial impacts from the recent actions taken by VillageMD management team to accelerate profitability. 

“We believe the focused approach on improving performance in core markets, as well as rightsizing the cost structure, will provide VillageMD a platform for future growth,” he said. 

Near the end of the call, Wentworth acknowledged that the company has “hard work ahead … in our journey to simplify and strengthen WBA, but we are encouraged by our progress. … We are well-positioned to drive capital-efficient growth, rooted in our retail pharmacy footprint, and build out an asset-light health services strategy to deliver care for communities and create value for partners.” 

Senior leadership will continue its strategic review of the company’s businesses for another three to six months, according to Wentworth, “with a focus on maximizing growth potential and generating cash flow.”

The quarterly earnings report wasn’t entirely bleak. Walgreens reported sales of $37.1 billion for the second quarter, an increase of 6.3% relative to the same quarter last year. 

And Walgreens’ U.S. Healthcare segment, which includes VillageMD, Shields Health Solutions, and CareCentrix, delivered its first quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). 

Excluding the impairment charge and other one-time items, the company reported earnings of $1.20 per share, surpassing analysts’ average estimate of 82 cents per share, based on data from LSEG. 

Nonetheless, Walgreens narrowed its previous fiscal 2024 adjusted earnings per share guidance, which was $3.20 to $3.50; the revised range is now $3.20 to $3.35.

Our Take: Walgreens invested a total of $6.2 billion in VillageMD in 2020 and 2021, gaining a 63% ownership stake in the primary care chain. The plan at the time was to open 500 to 700 full-service physician offices in the ensuing five years, and hundreds more after that.  

Then, in late 2022, Walgreens shelled out another $3.5 billion — this time toward VillageMD’s acquisition of SummitHealth-CityMD, an independent provider group serving New Jersey and New York. Evernorth, Cigna’s health services business, also invested in the deal, reducing Walgreens’ ownership stake in VillageMD to about 53%. 

The investments were a bold move intended to secure Walgreens’ position as a health care services company.

According to Advisory Board, by 2023, Walgreens had opened more than 200 co-located VillageMD clinics, referring to the clinics inside existing Walgreens stores (as opposed to free-standing VillageMD locations). 

But the growth strategy obviously didn’t go quite as anticipated, and now, new CEO Tim Wentworth and other recently hired senior executives are trying to mitigate the damage.  

Two executives in the health care services equity research department at investment banking firm Jefferies offered insight as to why, Advisory Board reported: Size limitations in the stores may have made it hard to profitably scale the co-located clinics (i.e., not enough space for lab services and exam rooms), and the stigma associated with working in a retail store may have made recruiting physicians more challenging than expected. 

Although CVS Health is also closing some of its MinuteClinics in certain markets, the company doesn’t appear to be experiencing the degree of difficulty Walgreens is. Then again, CVS Health can rely to some extent on its Aetna health insurance business to steer members not only to the MinuteClinics but also the Oak Street Health primary care clinics CVS Health now owns. 

Amazon has also had to make a few adjustments in its attempts to gain a foothold in the primary care market. 

Walmart, on the other hand, has been slowly and steadily expanding its health care footprint, choosing to focus on select markets, usually in more rural areas. 

Will Walgreens give up entirely on its primary care ambitions and focus instead on its core pharmacy operations? It’s a possibility that some analysts and industry experts have been pondering. Or, can Tim Wentworth and his team stanch the flow from the company’s bottom line without having to resort to such an extreme measure?

Looks like we may find out in a few months, when the strategic review is finished.

What else you need to know
UnitedHealth Group’s Optum has offered to acquire Steward Health Care’s physician group, Stewardship Health, for an undisclosed amount. The deal includes Steward’s primary care physicians and other clinicians in nine states, according to The Associated Press. Steward Health Care, a Dallas-based, for-profit organization that operates more than 30 hospitals nationwide, has been in the spotlight the past several months as it attempts to gain financial stability and respond to a growing list of legal challenges. In February, Massachusetts Gov. Maura Healey sent a letter to Steward’s CEO, Dr. Ralph de la Torre, advising him to begin transitioning the health system’s licensed facilities in the state to new operators as soon as possible. Steward’s landlord, Medical Properties Trust, said at the time that it had received interest from potential buyers for nearly all of Steward’s facilities.

The AP reported on the potential deal with Optum on Wednesday, noting that the Massachusetts Health Policy Commission and antitrust regulators at both the state and federal level would need to review the acquisition before it can be completed. Optum, the largest employer of physicians in the U.S., is already part of the Department of Justice’s antitrust investigation into parent company UnitedHealth Group, according to multiple news outlets. By carving out the physician group from other assets, namely hospitals and other facilities, Steward could end up decreasing the value of those other assets, making it harder to sell them, Healthcare Dive reported, citing industry analysts. Additionally, if Steward should file for bankruptcy later on and is found to have been insolvent before completing the Optum deal, the physician group could be “clawed back” from Optum during bankruptcy proceedings and used to satisfy claims, according to an analyst with Hedgeye, Healthcare Dive reported.

Novo Nordisk agreed to acquire Cardior Pharmaceuticals, a biotech based in Germany, for as much as approximately $1.1 billion — which includes an unspecified upfront payment and potential milestone payments. Cardior’s lead candidate, an oligonucleotide referred to as CDR132L, is in Phase II clinical testing in patients with heart failure with reduced ejection fraction who have had a myocardial infarction. The compound is designed to halt and partially reverse cellular pathology by selectively blocking abnormal levels of a specific mRNA molecule, Cardior noted in the deal’s announcement. Novo Nordisk intends to expand development of CDR132L by investigating its use in patients with cardiac hypertrophy. The acquisition, which is subject to regulatory approval and other customary closing conditions, could be completed in the second quarter. Now that Novo Nordisk’s weight loss drug Wegovy (semaglutide) has received FDA approval for use in patients with concurrent heart disease, the company plans to build a portfolio of cardiovascular therapies. 

Advocate Health sold its senior home care business to Waud Capital Partners, a private equity firm based in Chicago. Advocate Health acquired Senior Helpers in 2021; the Maryland-based home care company operates more than 380 franchised and corporate-owned locations in 44 states, Canada, and Australia. Terms of the transaction were not disclosed. Steve Jakubcanin, an executive partner at Waud Capital, will serve as the executive chair of Senior Helpers’ board of directors. His previous experience includes leadership roles at Cornerstone Healthcare Group, AccentCare, and Kindred Healthcare, according to a press release.   

Northern California’s Sutter Health is partnering with Abridge, a startup based in Pittsburgh, to make Abridge’s generative AI medical documentation tool available to groups of Sutter Health’s physicians and advanced clinicians with the intent of reducing their administrative burden and giving them more focused face-time with patients. The tool generates a draft note based on the clinical conversation during a patient encounter. The note flows directly into the electronic health record, where clinicians can review and verify it. Abridge’s platform covers more than 14 languages and over 50 medical specialties — a distinct advantage for Sutter Health, which serves one of the most diverse patient populations in the country, the health system noted in its announcement of the partnership. Sutter Health and Abridge will also collaborate on integrating summaries of clinician-patient visits into the EHR for patients to access in digital documents after the visit. 

The FDA approved Merck’s Winrevair (sotatercept-csrk) for adults with pulmonary arterial hypertension to increase exercise capacity, improve functional class, and reduce the risk of clinical worsening events. The injectable biologic is the first activin signaling inhibitor to gain FDA approval for PAH. It works by improving the balance between pro- and anti-proliferative signaling to regulate vascular cell proliferation underlying PAH, Merck explained in a press release. Winrevair is administered subcutaneously once every three weeks and can be self-administered at home with proper training. Merck estimates the therapy will be available by the end of April. With a list price of $14,000 per vial, Winrevair will have an annual cost of approximately $242,000.

What we’re reading
Direct-to-Consumer Drug Company Pharmacies. JAMA, 2.27.24

Can Hospital At Home Finally Hit Its Tipping Point? Lessons From The Hospitalist Field. Health Affairs, 3.26.24


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